Will the New Bank of England MPC Be More Hawkish?

A few weeks ago I suggested that the first time we learn of dissent on the MPC over its monetary policy decision we will see a fairly major market reaction. We won't find out if there were any dissenters until the minutes of each meeting are released about two weeks later, (if security stays tight), and the markets have become used to unanimity since Martin Weale, although supportive in principle of forward guidance in monetary policy, disagreed with the detail of one of the inflation 'knock-outs', and for true dissent on QE or rate policy one has to go back much further.

On March 18th Governor Carney unveiled a major reorg. at the Old Lady, naming two new Deputy Governors , with Ben Broadbent becoming Deputy Governor responsible for monetary policy, taking over for Charlie Bean, who retires at the end of June. This creates a vacancy on the MPC, as Broadbent is already on the committee.

The second new governor is the IMF's Nemat Shafik, who will be Deputy Governor responsible for markets and banking, and she will also replace Paul Fisher on the MPC from 1 August.

As one would expect, Shafik has an impressive CV; IMF Deputy Managing Director since April 2011, following a stint as Permanent Secretary at the Department for International Development and she was just 36 when she became the youngest ever vice president at the World Bank.

The final MPC change is that Andy Haldane, already Executive Director for Financial Stability at the Bank, will swap roles with Chief Economist Spencer Dale, and joins the MPC.

So how does that leave the Committee's dove/hawk balance?

Fascinating research from the University of Warwick suggests Shafik and the new external member brought in to replace Bean may quickly become good candidates for dissent against the current 'easy money for ever' stance; they found that, 'The prevailing view is that new bankers initially take a tougher stance against inflation than their preferences alone would dictate in order to convince the public they are serious inflation fighters. After this period of initial toughness, they ease back into a policy in line with their underlying preferences,' and with reference with a new member's desire to signal their inflation-fighting credentials, 'Signalling increases the probability that new members are up to 35 percentage points more likely to choose high rates than experienced members, depending on how much uncertainty surrounds inflationary conditions at the time. '

Tipping the balance in favour of a prospectively hawkish stance, at least at first, Shafik is also credited with the quote, 'I think we all agree that inflation is the most regressive tax, and that the poor are best served by a central bank that can deliver clear and credible, low and stable inflation. Inflation doesn't have to be the only objective of the central bank, but a low inflation environment is clearly in the best interest of the poor because they suffer the most from the inflation tax.'

As a new entrant, Haldane might also be expected to act tough at his outset, but experience shows that BOE insiders are much less likely to step out of line with the Governor. He is classically referred to as a 'free-thinker', but he did cause a stir when he said, "Let's be clear. We've intentionally blown the biggest government bond bubble in history," speaking to the Treasury Committee in June 2013. Somewhat Delphically he added 'We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted'. I guess you could say that after the fact, (of QE), this was dovish, i.e. the BOE should taper QE slowly, whereas the first, 'bubble', comment seemed if anything hawkish.

With regard to the other changes, it is certainly the case that Dale was more hawkish than Fisher-another loyal BOE stalwart since 1990-when, coincidentally, he joined the bank from the University of Warwick.

Broadbent voted against the last increase in quantitative easing, when asset purchases were raised by stg50 billion to stg375 billion back in July 2012, whereas David Miles is likely to tow Carney's line most vigorously, and we still need to study comments from newer members Jon Cunliffe and Ian McCafferty to form a more informed view of their stances. In addition to his objection to the inflation knock-out, Mr Weale has also strengthened his hawkish credentials by commenting that, "I think it is very helpful if we try and explain that the most likely path for interest rates is that the first rise will come perhaps in the spring of next year."

The consensus view seems to be that the changes may on balance leave the disposition of the MPC unchanged, but with Carney's recent comment that rates may rise before the next election nudging him towards the hawks, I see a committee with only one dove, Miles, who may well continue to vote with Carney, three 'free-thinkers', Cunliffe, Broadbent and McCafferty, one known hawk, Weale, and three new members, in Shafik, Haldane and the new recruit, who all may be keen to burnish their credentials as tough Central Bankers.

With Dale leaving before the June meeting, but Fisher staying on for the July meeting, it seems unlikely we will see a hawkish dissent before August, when Shafik will join the club and presumably the new external member and Haldane will also be in their seats. Given the pace of expansion of the economy, which I expect to approach 4% this year, my conclusion is that there is a high probability that we will see a hawkish dissent at the August meeting and that rates will be higher by Christmas.